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HEALTHCARE AND THE UPPER MIDDLE CLASS

Did you know that 10 out of the 12 largest foundations in the U.S.1 are those of pharmaceutical companies? And do you know who the beneficiaries of their largesse are? Themselves. And do you know who the victims of their largesse are? First and foremost The Upper Middle Class, and secondly America. Well, maybe it’s the other way around, at least in absolute terms. Nevertheless, the existence of these “foundations” leads to an enormous allocative inefficiency that feeds off the Honeypot Economics of healthcare.

Basically, all the “donations” from these foundations are used to ameliorate or eliminate the co-pays on the drugs their parent companies manufacture, for those who can’t afford the co-payments. For example, let’s say the cost of a one-year treatment for a drug that’s on patent is priced at $25,000 by the pharmaceutical company that manufactures it (and owns the patent on it). Next, assume that one’s insurance picks up 80% of that cost, which leaves you on the hook for $5,000 out of pocket. Since many people don’t have the wherewithal to make that cash payment, the foundation of that pharmaceutical company administers some sort of a needs-based test, and if you qualify you get financial assistance from it. Back of the envelope, those making less than $50,000 a year may get a full reimbursement of their co-pay, those making less than $100,000 a year may get a 50% reimbursement, etc. Of course once you get to a certain level of annual income, you get zero reimbursement – so the guy who makes $250K a year is going to make the same $5,000 annual co-pay from his own pocket that a guy making $2.5 million a year does. Under the normal rules of capitalism, there’s nothing wrong with that. Unfortunately healthcare in the U.S. is anything but normal from an economic standpoint, so the pricing of the drug has nothing to do with the natural state of supply and demand. Nor for that matter, does it follow the optimization model of monopoly pricing, for those drugs under patent protection.

Instead, because the demand for many drugs is inelastic (sort of) and heavily to extremely subsidized, the drug companies ratchet their cost up to a new “optimal” pricing level – which I believe is largely based on what wouldn’t be viewed as obscene. So that $50,000 drug would normally be priced at $10,000 based on conventional economics ex-insurance(w/o any co-pay assistance), and you’d be making a more reasonable $1,000 co-pay.

Unfortunately, because of the wacky finances of our healthcare system, the true economic pricing model is irrelevant. Which leads to pharmaceutical companies heavily inflating the “list” prices of drugs, and leading to a higher out of pocket expense for anyone deemed able to afford it. Thus it has a lot in common with the current college tuition pricing model: take the retail price up to the max, and discount for all those who can’t afford it. In so doing, the Upper Middle Class once again takes it on the chin financially.

How do we fix it? Some might propose by socializing medicine, aka universal health care. That’s probably not going to happen in the USA, so I propose a very capitalistic solution: eliminating the health insurance layer as we know it, and having the consumer pay (and save) directly for all health care expenditures. Here is someone else’s very rational proposal for implementing this, and I have yet to see a better solution.